10 Tips for CFOs in a Downturn. Don’t be swimming naked!

Are we experiencing a mild financial downturn or the beginning of the end of civilisation as we know it? I don’t have a crystal ball but suggest that at the very least there are more difficult, risky and uncertain times ahead and we certainly seem closer to the end of the cycle.

For all Chief Financial Officers, readying a business for a market downturn and creating “buffers” to withstand a market shock and tough conditions is a key priority for the year ahead.

Here are 10 tips for Chief Financial Officers for managing in a downturn:

It can take time to find the bottom as downturns don’t tend to be short lived ie expect it to get worse before it gets better.

If a balance sheet solution is required to stabilise the company’s financial position, then this is generally better done earlier than later. It can get more expensive the longer you wait (see tip 1 above).

Focus early on costs ie don’t wait for an increase in revenues to provide the solution (see tip 1 above). Cutting early and hard is simplistic but often successful.

Create a change culture (if it doesn’t already exist!). Downturns necessitate lots of change and having a culture which embraces this will support its success and also key staff retention.

While we on staff, bring them along for the journey through ongoing communication and engagement while maintaining positivity (cant all be doom and gloom!). This is particularly important for key staff and high performers who you want to keep.

Following on from this, all change is management led so make sure that the:

Revisit how performance is analysed, measured and reported. The focus of financial reporting needs to move well beyond revenue and EBITDA (good in a rising market) to include for example cash, costs and restructuring initiatives (new focus areas in a downturn).

Bring in consultants to understand problems, not solve them (see tip 6 above). A business cannot rely on solutions to be implemented by external parties, problems need to be owned and managed by people who are full time in the business and have authority and responsibility over the relevant issues.

Don’t delay making hard decisions to shut down or exit any businesses, investments or operations which are causing a cash bleed. The “emotional baggage” attached to any “sacred cows” needs to be let go, not just because of the financial drain but also the ongoing distraction and consumption of management time.

CASH IS KING. This is last but definitely not least. Quickly build a more cash focussed culture around cash reporting, forecasting and preservation.

An extended period of cheap money has masked financial performance and management issues for many companies. As Warren Buffett famously said, “you only find out who is swimming naked when the tide goes out” – so best to get ready in advance of the water receding too far.